Central bank raises the Fed funds rate for the first time since 2023 as energy inflation remains a problem
As inflation continues to rise, fueled by soaring energy costs, the Federal Reserve decided Wednesday it couldn’t wait any longer to act.
The central bank announced a 25 basis point rate hike after its September meeting, moving the Federal funds rate to between 3.75% and 4.00%, ending a stretch of five straight rate holds. It was a unanimous decision, with all 12 FOMC members voting for a hike.
It’s the first time the Fed has raised rates since July 26, 2023. It’s a move likely to draw ire from the White House, which had threatened to cut off trading to certain countries if the central bank didn’t lower rates.
Joe Panebianco, CEO of AnnieMac, said that after a long stretch of inflation above the Fed’s 2% target, a hike was unsurprising.
"The Fed's decision to raise rates reflects their concerns over inflation running above target these past 5 years,” Panebianco said. “The conflict in Iran is having an adverse impact on fuel costs, which in turn affects everything from food prices to travel. This is keeping costs, and mortgage rates, elevated, which puts downward pressure on housing affordability. AnnieMac is hopeful that once the conflict abates and pricing stability is restored globally, homeowners and borrowers will benefit as a result."
Inflation the driving factor
Melissa Cohn, regional vice president of William Raveis Mortgage, said the decision reflects a Fed that had little room left to justify standing pat.
"I think the Fed should be in a position to raise rates at this point," Cohn said. "Inflation is clearly going in the wrong direction, oil prices are surging, and there's no immediate sign of a positive change in inflation figures. It's likely to get worse before it gets better."
Cohn said the move signals which half of the Fed's mandate is winning out for now, even with the labor market still holding up.
"The Fed needs to make sure that everyone understands that they maintain their dual mandate, and that inflation is more important right now than unemployment, because we've seen solid jobs numbers," she said. "They need to put a lid on inflation and raise rates."
Sam Williamson, senior economist at First American, said the increased pressure from the White House runs into a basic reality about how the committee operates.
"Political pressure adds to the noise, but is unlikely to alter the course of monetary policy," Williamson told Mortgage Professional America ahead of the meeting. "The FOMC is a consensus-driven committee, and its credibility rests on keeping monetary policy tethered to the economic data. If markets perceive policy as politically driven, calls for lower rates could produce the exact opposite result by increasing inflation expectations and policy-risk premiums, pulling Treasury yields and mortgage rates along with them."
What this means for mortgage rates
Charles Goodwin, VP and head of bridge and DSCR lending at Kiavi, said the relationship between this decision and what borrowers will actually see is more complicated than it looks.
"Given the August CPI report results indicating that inflation remains elevated, markets are increasingly expecting the Fed to raise rates by roughly 25 basis points," Goodwin said. "While this may feel like bad news for potential homebuyers, it's important to note that this move does not necessarily translate into an increase in mortgage rates, which are more closely tied to longer-term Treasury yields and have already absorbed some expectations for tighter monetary policy."
Cohn pointed to last year's rate path as evidence that the relationship between the Fed's benchmark rate and what borrowers actually pay is not as direct as it might seem.
"In 2025, when the Fed was cutting rates, mortgage rates went up," she said. "So, who's to say that in 2026, if the Fed raises rates, that mortgage rates can't come down?"
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